First of Four Questions (Repeat)

First of "Four Questions"
It’s Passover. Why is this recession different from all other recessions?1. The banks are in more trouble than ever before, since WWII, and maybe ever. The only reason there are not more bank failures so far is FDIC and TARP and other bail-outs and expected bail-outs. A recovery of any oomph requires a loaning system that works and we are a long way away from this.

2. The world economy is worse than a mess. It’s both economically and politically frightening. But narrowly, a normal recovery requires us to export and that can’t happen in any meaningful way in today’s nightmare.

3. Recessions are usually caused by the Fed’s tight money policy instituted to fight inflation and recoveries are usually caused by the reversal, easy money. I think this was true of every recession since WWII, with possibly an exception being the readjustment after the War, which is called a recession, but probably shouldn’t be. This time the Fed neither caused the recession nor has it been able to reverse it, even though it has indirectly lowered Treasury Bills to zilch and flooded the economy with money. (My CREF money market fund appears to be increasing at the annual rate of 1%!, if that.)

4. Beyond this are the unique situations: (A) income and wealth are more concentrated than anytime since the late 1920's. The more inequality the more difficult it is to increase consumption expenditures, since wealthy persons presumably save a greater proportion of their incomes, although how much that is true these days is uncertain.

(B) Savings rates had plunged to zero from a post-war average of about 8%, although it is now creeping higher. The effects here are complex and not readily analyzed. People who saved less, from their incomes, did so (in many cases) because they thought they were "earning" money on their houses and borrowed on their higher-valued houses. This, presumably, is no longer happening, at least in a meaningful way. But also, people borrowed on their credit cards in amounts they previously had not done. This, too, is not as possible.Hidden away in Wednesday’s Times, on B9, was a story which began, "Consumer borrowing plunged in February at a 3.5 percent annual rate, more than analysts had expected, as Americans cut back their use of credit cards by a record amount."The irony is that while individuals should save more, to protect themselves in case they lose their jobs (and because they have no way of paying off loans), what the economy needs is more spending and less saving.

( C) The trade deficit is at record highs, both absolutely and percentage-wise. The budget deficit has been unusually high and for 2010 will probably be almost as high as it was during World War II. Both of these factors make recovery more difficult.

( D) Housing construction cannot save us. The low interest rates the Fed created, in the past, that stimulated the economy and led to recoveries, caused mortgage rates to fall and, therefore, there was greater housing construction. Given the collapse of housing, preceded and caused by the bursting of the bubble, housing can’t play the positive role it usually plays in a recovery.

(E) Manufacturing ceases to play as significant a role in our economy than it did in the past.

(F) Finally, the present is a product of two big bubbles, both of which have burst. This makes comparisons of the past and present difficult, since what is needed is comparability. (Maybe more on this later.)